In this last chapter we try to sum up the findings from our study of the forest sector in Murmansk Oblast by using some evaluation criteria presented in Chapter 1. The findings will be related to the IAD-framework and the possible future of the industry will be elaborated.
Evaluation Criteria
We will go through the evaluation criteria that were listed in the introductory chapter.
The same criteria is used in all of the regional reports undertaken in IIASA’s Institutional Framework study in order to be able to identify regional differences. They will allow us to make some conclusions about the extent to which the forest companies are restructuring towards a market economy and the extent to which the institutional
framework in which they are embedded really has changed and become more open and democratic. The problems with answering these questions are manifold: first, it is by necessity highly speculative to say something general about a diversified society and companies that are developing in different directions. Second, we are not sure about the goal of the restructuring process, neither at the company level nor at the macro level.
The political instability and continuous changes of leadership make the future uncertain and often prevent companies to take the necessary steps.
Are Constitutional rules acknowledged and transparent?
The legal framework in Russia has gone through tremendous changes during the last few years. Everything needed to be changed fast and the adoption of the most important laws was blocked in the Duma because of an unfavorable composition of the parliament with no political force in majority. The final version of the law text was therefore often not perfect, but the best one could expect after numerous revisions and making compromises with different political blocks.
The main problem is inconsistency and lack of coordination between the laws. What might be legal according to one law might be criminal according to another. For instance, the Forest Code is in contradiction with the Constitution when it comes to property rights and in contradiction with the Environmental Protection Law when it comes to protection of species.
Continuity is another problem. An adopted law can easily be amended or abolished by Presidential decrees and this can rapidly change the daily life of companies. In particular small companies have problems in keeping abreast of the continuous changes in legislation and need expertise in laws and bookkeeping in order to be able to meet requirements. The tax law causes huge problems both because the tax rate is too high and because the loopholes in the texts are numerous and “must” be utilized.
When it comes to transparency, there are unfortunately some decrees and agreements (usually between the President and different regions) that are secret and not known to the public. Some of these agreements deal with natural resources, like oil and gas, but we have no information of any secret agreements concerning forestry.
Is the structure of property rights settled and well defined, i.e., can private actors acquire property or get the right to utilize property for their own benefit?
The Forest Code has not made the property rights to forest resources completely clear.
All the forests still belong to the federal state and the role of the region is ambiguous.
This has become a problem for those regions that have developed their own Forest Codes. Murmansk Oblast never had its own code and never developed a regional interest in the forest property debate, so this has not been an issue. The rules for acquiring timber should be clear for the companies, though formal leasing and auction agreements are sometimes avoided by direct negotiations with the leskhoz. This can generally be seen as a negative feature that reduces transparency of agreements and hinders competition. But, in the case of Murmansk there is no real competition and direct negotiations are used to simplify the procedures.
When it comes to the property rights of forest company estates, it can be questioned whether the privatization process actually gave private actors a possibility to acquire property. Our investigation shows that about half of the privatized forest enterprises were formed as closed joint stock companies. This means that only the employees could access the shares and become owners. In practice, the leadership obtained the majority of the stocks and the workers had little influence. The open joint stock companies were exposed to bids from outside investors, though there were few outsiders who had enough money and interest in making investments. It is not sure that a more open company form would have attracted more outside shareholders. Since most of the companies in the Murmansk sample are genuinely new (i.e., not old, privatized state companies) the ownership has developed according to the founders’ contribution of capital.
Are rules and regulations from official authorities regarded as legitimate and do they apply equally to similar actors?
One can hardly say that rules are legitimate since most companies complain about and try to avoid them. The business sphere is definitely over-regulated with laws, rules and resolutions. The tax rules are an example, where cheating and utilizing the loopholes are necessary for survival. It is hard to trust the authorities when they accept illegal solutions themselves. Rules are often not equal to identical actors. Again, taxes are an example of negotiations between companies and the authorities. Non-monetary payments are often accepted and exemptions can be discussed. Good contacts and personal relations with the authorities can be a more important part of business life than running a profitable company.
Does the market decide the prices of property and goods?
The market price for a standing forest is often claimed to be too high by the harvesting companies but, in fact, prices are rather low compared to western markets. The stumpage fee, below which prices are not allowed to decrease, is not reflecting the market price and is often used in Murmansk Oblast where there is little competition.
Only in the southern part of the region are prices sometimes slightly above stumpage.
The privatization of the state owned forest companies were not carried out in a way that can be said to reflect the market value of the enterprises. Most were given to the employees for a symbolic price, as a result of bargaining between the authorities and the company leadership. It is difficult to know if there would have been many others interested in buying the facility, as it was in most cases old and of limited value.
However, it enabled the old leadership to start anew and get rid of debts. In general, there were few that had enough money to invest in an enterprise as the privatization process went hastily and at a time when savings were minimal.
Prices of forest products are now to some extent set by the market. This is especially true for the export price. The low demand on the domestic market forces companies to sell at prices that can be less than the production costs. The problems of getting cash payments and the extra transaction costs involved with the barter economy also contradict the market forces in price setting. Goods are assigned an artificially high price and can be paid for with other goods that are difficult to sell.
Is decision-making regarding collective choice and operational rules decentralized?
The management of forests has been decentralized to the Murmansk Forest Manage-ment and decisions can now be made closer to the users of the forests. However, as federal financial support has decreased substantially, this is a decentralization that has transferred much of the economic responsibility to a lower administrative level.
On the company level, privatization has definitely lead to a decentralization of decision making. Since there is no regional union or holding company in Murmansk (as in most other regions), companies have been left alone without too much interference. The absence of a forest lobby has also left all decisions with the individual firm. A few state owned companies owned by the State Property Fund or municipal authorities are an exception.
Can private investors realize the returns on their investments?
The possibility of a shareholder to realize the return on his investment is dependent upon the legal status of the company and connected to his initial instalment. The workers seldom own many shares. The majority of the shares usually belong to the managers or outside investors. We have reasons to believe that few shareholders can take out any profits at this stage, as most of the enterprises are unprofitable and have huge debts. It will definitely be a better strategy to invest the profit in the company.
Asset stripping is however, a well-known method of extracting the valuables when companies are declared bankrupt. This also happened in Murmansk after privatization of the forest enterprises but that is, of course, not an appropriate way of realizing returns.
Are rules enacted aimed at preventing the devastation of natural resources?
Some of the critics of the Forest Code indicate that it contradicts other laws, such as the Law on Nature Protection. The major focus on harvesting can affect biodiversity and protection of rare species.
The economic difficulties of the leskhozy are also something that will have a long-term effect on the sustainability of the forests. Leskhozy do not have enough money to do the necessary replantation after clear cutting, fighting diseases, and performing the required fire prevention.
Do legitimate authorities take measures against violation of rules?
Violation of rules are frequent when there is no respect for the rules, no trust in the authorities that are supposed to maintain them and no enforcement that can prevent repeated disobedience. Russian forestry lacks these driving forces in the same way as the management lacks economic resources. Violation of rules is often profitable as the possibility of being caught is low, punishment is no deterrent, and one can usually bribe one’s way out of a situation.
Violation of business agreements is also common and can only be brought to the arbitration court if the company can afford lawyers’ expenses. Small companies usually
can not afford this and the enterprises must take the burden themselves. A legal court decision is by no means a sufficient prerequisite for payment, as the business partner often is insolvent and is declared bankrupt. Informal sanction methods (like using the
“mafia”) can often be more effective. Many conflicts also arise between companies and authorities as in the case of tax disputes. The arbitration court has developed in a positive way facilitating business, but again there is still a long way to go to accomplish trust in legal authorities.
Conclusion
This section tries to sum up the findings of the report according to the institutional analysis and development framework (IAD) outlined in the introductory chapter and some important concepts of sector studies in a transition economy.
Our study of the forest sector in Murmansk Oblast focuses on a region that differs from other Russian forest regions as it has only limited forest resources. The climatic conditions and low productivity in the north has limited the extent of forestry and industrial activities leading to a sector with few and small units. However, the “rules in use” in Murmansk are not so different from other Russian regions studied in IIASA’s institutional analysis study. Federal laws and the Forest Code set the standard for all forest activity, but through priorities expressed in programs, funds and regional laws the regions themselves can influence the working condition for forestry and forest industry.
Murmansk Oblast is a region without a clear priority for its forest sector activities as there is no forest lobby in the regional administration and no programs to attract domestic or foreign investments.
One peculiarity of the forest sector in Murmansk Oblast is that wood harvesting and a limited industry based on processed products were developed and run with heavy state subsidies. No doubt this dependency has affected the ability of the privatized companies to manage on their own. A pulp and paper industry was never developed in the region.
The settlements of the Kola Peninsula were built on the development of natural resources like minerals and fish, but the forest sector was never of any importance for employment or industrial output produced in the region. The socioeconomic condition of the region is not particularly positive as people are moving to the south and the forest sector is losing specialists for better paid jobs in other sectors or regions.
As in other regions, all forest management units (leskhozy) have experienced a lack of state funding and are not allowed to make money from their own industrial harvesting.
This has hit forestry in the region particularly hard since several leskhozy have no (or only a very small) demand for forest plots or forest products. The numbers of plots sold through auctions and leasing are limited and there is no real market with competition on prices of forests.
With this rather depressive history, the Murmansk forest industry was hit by a more or less forced privatization during the transition period at the beginning of the 1990s. Most companies in the Murmansk Oblast were not prepared for restructuring as they lacked money for investments, equipment and machinery and management skills. The action arena changed completely as old customers disappeared and new relations had to be developed. New forms of timber acquisition were launched and market prices were
introduced not only on the wood and forest products, but also on transport, electricity, fuel and other important expenditures for the sector.
The outcome of the transition was an extensive drop in wood harvesting from one million m3 at the beginning of the 1990s to less than 100,000 m3 in 1998. This drop is relatively larger than in the other Russian regions in the IIASA study. But when we take into account the minor size and importance of the sector prior to transition, we must say that the effect of the drop was much smaller here than in the intensive Russian forest regions. A limited number of people and families in the villages were affected but the consequences for them were, of course, serious.
An interesting question is whether any other outcome of the transition process of the forest sector in Murmansk Oblast could realistically be expected. We believe that the forest sector in Murmansk Oblast lacks important preconditions for a successful change.
• Privatization without restructuring
First of all, the privatization of forest companies was carried out in a way that often prevented real restructuring. Most managers in the state companies continued in the privatized enterprise without adapting to the new market. They made no restructuring of the production process, economic dispositions and management. A privatization process without real restructuring can not succeed and our interviews with company representa-tives have confirmed their unwillingness to restructure. Nearly half of the companies wish to revert to some kind of centrally planned and subsidized forest sector. With this attitude one can hardly expect vital changes.
• Privatization without investments
Privatization also requires investments. But since most companies were given to the employees more or less for free, little fresh money was brought into the ventures. Few outside investors were interested in the sector and the bank crisis made funds inaccessible for the owners. The fact that many companies had to sell their equipment when they became bankrupt does not help to make a new start as a privatized company.
• Market economy without demand
In a market economy, prices for the forest products must be set according to the pro-duction costs but at the same time reflect what the market is willing to pay. In Murmansk, there were few who wanted or could pay. The construction firms, mining and fishing industries no longer demanded any forest products, as their own production had been drastically reduced. Some forest companies continued to produce for storage, hoping for better times, while others limited production to a minimum.
• Market economy without payments
Forest companies are kept in an evil circle where both sellers and buyers have huge debts. This seldom brings real money into business operations and makes the trans-action costs high. Barter and non-monetary arrangements are a way of solving
short-term payment problems and keep the company operating, but it is not a constructive solution for developing a market economy.
• Development of a forest sector without priority
The forest sector of Murmansk Oblast has suffered from a lack of priority in the regions’ budgets and political programs. This is a problem for both private companies and the management units, the leskhozy. The forest management is dependent upon funding and the income to the regional (oblast) administration from the stumpage fee shall, according to the law, be transferred back to regenerating the forest. Our material demonstrates that such a transfer does not exist.
Does Murmansk Oblast Need a Forest Industry in the Future?
An unpleasant, but appropriate, question that should be asked is whether the Murmansk region really needs a forest industry. With a minimal demand of forest products, harsh climate and growing conditions, small and unprofitable production units, and lack of skilled workers, perhaps it would be better to buy the needed products from neighboring regions or from abroad. It might even be cheaper.
The main question here is if there really will be a demand for the forest sector output produced in the region in the future. Can the companies count on a regional/domestic market for their products? It is obvious that the economic crisis has affected the demand for all kinds of products and we can only speculate about the future situation. There are definitely private persons and companies who need and want to buy forest products, but lack of financial resources hinder them in realizing the demand. To change this deadlock requires tremendous amendments of the whole Russian economy and policies.
Changes that will make it easier for the companies to operate in a normal market with free prices, supply and demand.
First, let us take a look at the expected demand for firewood. This product is mostly required by the local population and is used for heating private houses. Houses with a stove for firewood are mainly located in countryside villages that are dependent upon wood as an energy source to keep warm during the arctic winters. The village population is limited (7.7%) and urban residents do not use firewood as they are connected to central heating. The exception can be those who have a country house, a datcha. Russians have a tradition of cutting timber in the forest themselves and not buy
First, let us take a look at the expected demand for firewood. This product is mostly required by the local population and is used for heating private houses. Houses with a stove for firewood are mainly located in countryside villages that are dependent upon wood as an energy source to keep warm during the arctic winters. The village population is limited (7.7%) and urban residents do not use firewood as they are connected to central heating. The exception can be those who have a country house, a datcha. Russians have a tradition of cutting timber in the forest themselves and not buy